One of the less talked about provisions of the Secure Act is the allowance of in-service distributions for qualified child births and adoptions, otherwise known as a “QBAD”. In November, the IRS provided guidance for how these distributions are to be administered. In Qualified plans, individuals are now permitted to withdraw up to $5,000 for each child/eligible adoptee. The withdrawal must be within the one-year period beginning on the date on which a child is born or on which a legal adoption of an eligible adoptee is finalized. Each parent is permitted a $5,000 withdrawal. This withdrawal is not subject to the normal 10% tax penalty for early withdrawal.
A plan administrator may rely on a reasonable representation from an individual that he or she is eligible for a QBAD. Substantiation is not required unless the administrator has actual knowledge to the contrary. For an adoptee to be eligible, the adoptee must be under 18 or “disabled” and must not be a child of the taxpayer’s spouse. If the adoptee is 18 or older, he or she must be unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or to be of a long-continued and indefinite duration.
An individual receiving a QBAD may recontribute the QBAD. The Treasury Department will issue regulations relating to the recontribution rules – specifically, the timing of recontributions – in the future.
QBAD provisions in an eligible applicable plan are optional at the discretion of the plan sponsor and not mandatory. If it does, the plan must be amended by the last day of the 2022 plan year. If you wish to add a QBAD provision to your plan, please let us know.